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Financial distress prediction model: The effects of corporate governance indicators
Author(s) -
Chen ChihChun,
Chen ChunDa,
Lien Donald
Publication year - 2020
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2684
Subject(s) - corporate governance , pledge , business , sample (material) , financial ratio , financial distress , equity (law) , distress , actuarial science , accounting , finance , economics , econometrics , financial system , psychology , political science , chemistry , chromatography , law , psychotherapist
This paper constructs a financial distress prediction model that includes not only traditional financial variables, but also several important corporate governance variables. Using data from Taiwan, the empirical results show that the best in‐sample and out‐of‐sample prediction models should combine the financial variables with the corporate governance variables. Moreover, the prediction accuracy is higher for the models using dynamic distress threshold values than those with tradition threshold values. Most financial ratios, except for the debt ratio, are higher in financially sound companies than in financial distressed ones. With regard to the corporate governance variables, we find that the CEO/Chairman duality may not result in the outbreak of financial distress, but higher equity pledge ratios of managers (shareholding ratios by board members and insiders) positively (negatively) correlate with financial distress.